The Securities and Exchange Commission's staff, over objections from investor and consumer groups, is recommending that the commission back off from several auditing reforms it was considering in response to scandals at Enron Corp. and other companies.The staff, at the urging of the accounting industry, will not propose limiting the industry's lucrative consulting work in finding tax shelters for clients they audit, staff members said at a briefing yesterday.
The officials from the SEC's chief accountant's office said they also favor altering a Clinton-era rule that requires companies to break out what portion of their auditing firm's fees comes from work other than auditing. They favor allowing accounting firms to count as auditing revenue money from services that some investor and consumer groups consider unrelated.
The staff is to present the recommendations today to the five-member commission, which then plans to vote on rules intended by Congress to make accountants more independent from the clients they audit. Investor and consumer groups say the vote will show how far the agency's five commissioners -- a majority of whom worked for big accounting firms before joining the agency -- will go to reform the auditing industry.
"This is a big win for the auditing firms, and investors are taking it on the chin again," said Lynn E. Turner, chief accountant at the SEC in the Clinton administration. "How can you go through Enron, how can you go through Tyco, how can you go through WorldCom and still have an SEC that is putting accountants before investors?"
Accounting firms have argued that providing tax advice has long been accepted as part of their job. Tax services account for at least one-fifth of revenue at the large firms, according to a 2000 industry study.
In meetings at the SEC and in written comments to the agency, some accounting firms have said restrictions the SEC is considering go beyond the auditing reforms mandated by Congress last year, when it passed the Sarbanes-Oxley Act.
"Minimization of taxes maximizes profit for the company," William F. Ezzell, chairman of the American Institute of Certified Public Accountants, a trade group, said recently. "That is a benefit to the company, therefore a benefit to the shareholders."
The Sarbanes-Oxley Act, passed by Congress and signed by President Bush last summer, banned several categories of consulting by auditors, and the SEC is preparing to define the ban more precisely.
Congress did not prohibit tax services. But in a proposal released last month outlining its preliminary thinking on the issues, the SEC said auditors may compromise their independence if they advise companies on how to cut their tax bills and then judge the effect on the companies' financial statements.
Yesterday, the SEC staff officials said they favor leaving decisions on tax consulting by auditors to a company's board of directors.
The SEC staff also will recommend that the agency adopt looser rules than first proposed on how long an auditing firm can work for one company. Those rules were intended to ensure that auditors don't stay too long and become too friendly with and influenced by clients.
The SEC has a Jan. 26 deadline to translate into rules many of the reforms the Sarbanes-Oxley Act mandates. Last year, when accounting problems at U.S. companies cost investors billions of dollars, many members of Congress concluded that auditors became too close to the companies they were supposed to be watching and lent their credibility to financial reports that inflated revenue and profits. The heart of the problem, as many lawmakers saw it, was that audit firms were marketing lucrative consulting services to their audit clients.
Critics say that allowing companies to include some consulting jobs in audit fees could inflate those reported fees and, in the process, make potential conflicts of interest with non-auditing services seem smaller.
"The whole point of breaking out the fees is to allow investors to determine the extent of the conflict, to determine what else the auditor has at stake financially with a company," said Barbara Roper, director of investor protection at the Consumer Federation of America.
Sarbanes-Oxley banned auditors from providing "human resources" services to the companies they audit. But, in a draft of its rules released last month for public comment, the SEC left itself the flexibility to make exceptions in the final rules. It asked for public comment on this question: "Does it impair an auditor's independence if the auditor provides consultation with respect to the compensation arrangements of the company's executives?"
The act also banned auditors from helping clients with the "design and implementation" of computer systems used to generate the financial data they are responsible for auditing. The SEC requested public comment on this question: "Is an auditor's independence impaired when the auditor helps select or test computer software and hardware systems that generate financial data used in or underlying the financial statements?"